Financial outlook of the stock
Toll Brothers Inc (NYSE:TOL) is one of the top home builders involved in the business of designing, building and financing for homes in luxury residential communities. Operating in 20 states, the company mainly targets high income individuals earning more than $100,000 a year.
In 2012, the company earned $2.86 billion with a net profit of around $4 million in the first quarter of 2013 compared to a loss of $2.8 million a year ago. The real estate market is volatile; however, Toll Brothers Inc (NYSE:TOL) has a sufficient number of rental apartment projects in the pipeline. That suggests the company can handle the market conditions and can negotiate a downturn pretty well.
Rising real estate market
Around 2005, new home sales peaked before making a rapid descent. Lenders started to provide more and more loans to home buyers without performing any due diligence. That ultimately led to the housing collapse and subsequently the financial crisis.
Toll Brothers Inc (NYSE:TOL) was also not immune to this crisis. However, from 2012, we find a reversal in trends and the pace of new home sales has begun to pick up. Reduced interest rates by the Fed also helped the cause. Presently, the housing market demand is at a peak and is gathering momentum after a brief lull of seven years.
The peer market
Most of the big builders have been rising, currently up around 54% from a year ago. More and more builders are going public, with the latest one being Arizona based step-up builder Taylor Morrison Home Corp (NYSE:TMHC). It made its initial public offer in April quoting at a price range of $20-$22 per share.
During 2012, Taylor Morrison Home Corp (NYSE:TMHC) generated $879 million in revenue and $82 million in net income. The stock has good fundamentals and has plenty of upside potential. The mean price target represents around 17% upside potential. The timing of the IPO has also been good and the stock has been rising since then. The IPO benefited from a recovery in new home sales following the housing crash since the Great Depression.
With a market capitalization of $800 million, the price to earnings (P/E) ratio of Taylor Morrison Home Corp (NYSE:TMHC) is higher than competitors like D.R. Horton and PulteGroup. The shares of the company are almost 6% higher post its IPO. I expect sales of this home builder to grow much more in the coming years if the company makes good use of its IPO proceeds. The short interest in this home builder has risen significantly from last year. In fact, it doubled from May 2012. However, this will not have a deep impact on the stock as the short interest represents just 2% of the total float. I believe long term investors can make a good bet on this stock.
KB Home (NYSE:KBH) is another home builder with significant inventory in California, which was one of the hardest hit states during the downturn. The stock has been growing higher and higher over the last 2 years. Since 2012, KB Home (NYSE:KBH) is up almost 200%, from $6 a share to $20 a share. However, recently the company is facing stiff competition and is a laggard among all the housing stocks. Growth is slower with a high cancellation rate of 32%, thereby becoming a less attractive investment.
The gross margin of KB Home (NYSE:KBH) is also the lowest among its peers, standing at 15%. On top of that, it does not have enough cash on hand to make significant investments. The growing debt on its balance sheet is not any good for the stock price. All in all, it looks like KB Home has not benefited much from the housing recovery and might not provide much value to the investors.
As a summary of the peer market competition, Toll Brothers Inc (NYSE:TOL) seems to be the best performing stock looking at all the major indicators. With an EPS growth of 39%, it is selling for 46 times 2013 earnings, which is the highest among all the stocks.
Housing market on the recovery – Invest now
The economic indicators are starting to point towards a strong housing recovery in the US market. Invest now to make the best use of the opportunity. Toll Brothers Inc (NYSE:TOL) is a recognized brand in the country and has been performing well in the last six months. It has a relatively low beta of 1.15 and has a specific target market of high income individuals having a good credit rating. So, it can shield itself from the adverse market conditions better than its competitors. Looking at all the favorable factors at Toll Brothers, I recommend the stock as a buy.
The article This Home Builder Is a Good Buy originally appeared on Fool.com and is written by Tanya Kanodia.
Tanya Kanodia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Tanya is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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